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What Does the Future Hold for Mid-market Fund Managers?


11/16/15

Insights from the 2015 PERE New York Summit 
Last week’s PERE New York Summit hosted delegates from some of the largest private equity funds in the world, as well as a significant number of attendees from mid-sized firms with widely varying investment strategies, operating platforms, and funding sources. David Kessler, National Director of CohnReznick’s Commercial Real Estate Industry Practice, served as the moderator for a key opening panel: “What does the future hold for mid-market fund managers?” 
 
Insights from that panel, along with other significant takeaways from the two-day conference, are provided below.
 
1. Capital Raising Still Strong – But for How Long?
The panel members, along with most other delegates at the conference, are continuing to see record capital being raised for real estate investment on a global basis. However, there was also general consensus that a market correction is inevitable, most likely within the next two years. What might cause this downturn is subject to a great deal of speculation. 
 
2. Mid-sized Fund Managers Generally Not Competing with Megafunds
The mid-sized fund managers on the panel agreed that, for the most part, they are not directly competing with the larger funds but are, instead, pursuing transactions well below the radars of the mega funds. With rent growth remaining strong, especially in certain secondary markets like Atlanta, there are plenty of opportunities to pursue transactions. However, picking the ones that meet investors’ return expectations remains the determining factor. The prevalent attitude among the mid-sized fund managers was one of sustained optimism – although savvy managers are already positioning portfolios to be ready for the inevitable downturn, both in terms of holdings and tenant base. 
 
3. Is it Better to Be Big? 
In terms of sheer size, a manager of one of the larger funds addressed the question of when “big” can become “too big”? Size can certainly provide a competitive advantage, although capital raises often need to be scaled to what the fund feels it can strategically deploy. Given the current regulatory environment, growth is ultimately limited. Many mega funds failed in the last downturn, so there will always be a built-in level of residual investor caution. 
 
4. The Question of Specialty Lenders
In discussing whether room exists in the real estate debt market for specialty lenders, which currently make up only 11% of the market, the consensus was generally positive. Given the amount of debt that will be coming due over the next several years, the reality is that non-traditional lenders will continue to strategically grow their niche in the market, given its appeal for developers to access vital capital for fast execution. With this in mind, it is becoming increasingly imperative for developers to maintain proactive, working relationships with these specialty lenders.
 
5. Global Investment
The U.S. is still king for inbound global capital investment in commercial real estate. However, pricing, especially in the office sector, is becoming increasingly expensive in gateway cities. New York remains the perennial safe haven for foreign capital by virtue of its sustained strong fundamentals. But elsewhere, fund managers are reporting that it feels more like 2000 than 2007. Given this, now might not be the most promising time to be a hero for a few additional basis points.  Managers should, instead, be focusing on pricing dynamics, which will enable them to gain better insights as to how different cities/markets are positioned in different places in the current cycle. Different assets classes in different markets are recovering at various paces. Outside of the U.S., Britain and France appear to be strong markets, as do Brazil and Japan which continue to provide attractive opportunities as well.
 
6. Technology and Mid-Market Funds
Regarding technology, or “big data” as it is often colloquially referred to, mid-market firms are relying more and more on tech for on-demand investor information and drilled down communications, as well as for streamlining and optimizing some of their internal operations. Due to legal concerns, however, certain documentation will always remain necessary.
 
7. Keys to Success
The consensus among participants was that building portfolios and gaining scale are the keys for middle-market fund managers to insure and sustain long-term success. For example, fund managers are looking at more mixed-use properties and assets in their portfolios that are located closer to major transportation hubs, while continuing to explore opportunities in secondary and tertiary markets more often overlooked by the larger funds.
 
Surprisingly, two topics that were expected to generate a lot of discussion during the PERE Summit – but didn’t – were demographics and interest rates. Apparently, those topics are well-covered and well-absorbed. It is generally agreed that demographics will continue to actively drive sectors such as multifamily and office. Key demographic trends can be readily tracked and are, for the most part, reasonably predictable. In the case of interest rates, it’s a lot like talking about the weather. People and companies will react as they need to, and there’s not much anyone can do about it. 
 
CohnReznick was proud to participate in the 2015 PERE New York Summit and serve as a presenting sponsor. The event was well attended, informative, and focused on the trending, critical issues that impact virtually all stakeholders in the commercial real estate industry.
 
Contact
For more information, please contact David Kessler, Partner, National Director - Commercial Real Estate Industry Practice, at 301-657-7755 or david.kessler@cohnreznick.com
 
To learn more about our commercial real estate industry services, visit our webpage.
 

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 

 
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